Legg Mason Opportunity Is a Winner Again—But for How Long?

Manager Bill Miller warns that great investment ideas are getting harder to find

By

Suzanne McGee

Oct. 6, 2013 4:50 p.m. ET

For the fourth quarter in a row, stock picks by
Bill Miller
and his colleagues made
Legg Mason Opportunity
the best-performing mutual fund based on 12-month return in The Wall Street Journal's quarterly Winners' Circle survey.

More in Investing in Funds & ETFs

Just don't bet it will continue, Mr. Miller is the first to caution. "I hope it lasts until the end of my career, but the streak is probably coming to an end," says the 63-year-old veteran manager. He says he and assistant manager
Samantha McLemore
are finding far fewer great investment ideas in the wake of the big rally that propelled the S&P 500 to a 19.8% return (including dividends) in the first nine months of 2013 and 19.3% over the 12 months through September.

A Strong Showing

Legg Mason Opportunity returned 63.25% over the 12 months through September, according to Morningstar Inc. Nine stocks of about 60 in the $1.4 billion portfolio doubled in the past year, its managers calculate, while fewer than 1% of companies in the S&P 500 did so. Among the stocks that drove the fund's big advance:
Groupon
Inc.
(up 130%),
Best Buy
Co.
(up 220%) and
Netflix
Inc.
(up 234%).

ENLARGE

Bill Miller is the lead manager of Legg Mason Opportunity.
Bloomberg News

The Winners' Circle contest looks at diversified U.S.-stock mutual funds with more than $50 million in assets and at least a three-year record, based on preliminary data from Morningstar. It excludes index funds, leveraged index funds and inverse leveraged index funds. The second-ranked fund for the latest 12-month period,
Lord Abbett Micro Cap Growth
,
rose 56.49%.

This isn't the first time Mr. Miller has been on a notable roll. Under his leadership,
Legg Mason Capital Management Value Trust
beat the S&P 500 for 15 years in a row, through 2005. After that came years of dismal returns that ranked the fund near the bottom versus peers and led investors to flee. Mr. Miller left the Value fund in 2012, but continued at the helm of the smaller, more flexible Opportunity fund.

Mr. Miller says that during the Value fund's run, he tried to communicate to investors that "there is no money manager that never has had a bad period." He says "a streak creates a set of expectations that don't make any sense and that it's hard to live up to. If it's positive, people are likely to end up disappointed."

Perhaps because of Mr. Miller's hot-to-cold-to-hot history, or just because of anxiety about the outlook for stocks, investors haven't rushed to invest in Legg Mason Opportunity.

Investors Hold Back

"I would have expected stronger inflows than we have seen," says Mr. Miller, who describes them as "steadily positive but not aggressively so."

ENLARGE

Investors seem genetically programmed to chase performance—a trend that financial advisers bemoan and try to address with clients. In selecting funds wisely, "it's not just the size of the returns, but their consistency and the amount of risk the manager is taking," says
Zoe Brunson,
director of investment strategies for Genworth Wealth Management in Pleasant Hill, Calif. (She says she didn't invest in Legg Mason Value when it was on the menu at her firm, nor has she put clients into Opportunity.)

As a manager, Mr. Miller isn't afraid to concentrate in stocks or sectors he believes are trading at far less than their long-term value. Picking up stocks like Netflix and Best Buy while they were in the doldrums paid off, but the strategy can also send a fund to the bottom of the charts rapidly.

Tim Courtney,
chief investment officer of Exencial Wealth Advisors in Oklahoma City, invested clients' money in Legg Mason Value when Mr. Miller was running it successfully but says he repeatedly sold shares to keep it from becoming too big a part of client portfolios as its performance outstripped peers. He says he still has client money in the Value fund but hasn't put any in Opportunity yet.

Some analysts and advisers suggest that, rather than looking for managers on a roll, investors seek out managers who are on a losing streak but have decent long-term performance. "Eventually, the odds favor the luck turning in their direction," says
Russel Kinnel,
director of mutual-fund research at Morningstar.

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